4 Ways to Avoid Small-Business Bankruptcy

When a small business hits hard times and can’t recover, its owner may want to consider filing for bankruptcy, especially if the enterprise has significant debt. But bankruptcy is generally considered a last resort, and it only makes sense in certain conditions.

Jim Rudnicki, president of Rudnicki & Associates, says that bankruptcy is usually a bad idea for small businesses. Instead, he advocates either revamping the business so it can succeed or, when that’s not possible, pursuing out-of-court alternatives.

“You can turn around a failing business if a viable core still exists, there’s enough cash flow to support the turnaround process, and key employees are willing and able to do what’s required,” he says.

Rudnicki, who specializes in business revitalization, offers these four tips for saving a struggling company and avoiding bankruptcy:

  1. Find more cash. This may sound like a statement of the obvious: If cash was plentiful, the business wouldn’t be failing. But Rudnicki points out that without the minimum amount of capital needed to stay afloat, efforts to recharge the business will prove futile. “Without [enough money], you’ll likely be so overwhelmed that you won’t be able to identify and address the root causes [of the problem],” he says. In the early stages of struggling, you might be able to borrow the money or convince investors to step up. Or, Rudnicki adds, it’s more likely that “to be successful you’ll have to liquidate some non-core part of the business or squeeze cash out through tighter management of the balance sheet.”
  2. Make a management change. A struggling business probably needs new people and new ideas to evolve. “All of us are creatures of habit to at least some extent,” Rudnicki notes. “For the turnaround to be successful, there will need to be a change in management, or at least a willingness to truly admit that business-as-usual cannot continue.” This can require honest and sometimes tough decisions, but without the right people in place the chances for improvement are markedly lower.
  3. Hire a consultant. Real change can be difficult, especially when the management team is “me, myself, and I.” Consider hiring a consultant who specializes in revitalizing failing businesses. As a starting point, Rudnicki recommends the Turnaround Management Association, which certifies experts in the field (like Rudnicki). An outside expert with a fresh perspective can help solve a viable business’s problems without necessarily requiring the owner to hire a new management team.
  4. Consider an Assignment for the Benefit of Creditors. “Some businesses fail because they no longer serve a purpose for a large enough customer base, so there’s really no reason to invest the time and energy trying to develop and implement a turnaround plan,” Rudnicki says. “It’s simply better to liquidate them and move on to a more beneficial endeavor.” In that case, there are out-of-court alternatives to bankruptcy. Rudnicki points to the Assignment for the Benefit of Creditors, or ABC, as an example. ABCs vary by state, but ultimately they represent a liquidation process that the American Bar Association [PDF] says is “structured to save time and expense in concluding the affairs of an insolvent company.” In Rudnicki’s home state of Illinois, “going through an ABC has been shown time and again to be a cheaper and faster alternative to a Chapter 7 [filing], resulting in a larger distribution to creditors,” he says.

About Kevin Casey

Kevin Casey is a regular contributor here, at InformationWeek and elsewhere. Find him on Twitter @kevinrcasey.
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7 comments
JaydenEden
JaydenEden

It sounds like you have to have money to make money. I guess that is why they have loans available. Maybe my brother will have to look into it some more because his company isn't doing very well right now.
Jayden Eden | http://www.kyattys.com/

Business bankruptcy
Business bankruptcy

nice post! but there are not only 4 ways to avoid bankruptcy. just come and think of it. gather some datas and info's and sources you can look more ways to it.  the best to avoid bankruptcy for my perception is to take your responsibilities and proper management when it comes to financial state.

Bankruptcy Gold Coast
Bankruptcy Gold Coast

Great Post, I like the Idea in tips for saving a struggling company and avoiding bankruptcy is Hiring a consultant, This would greatly help for you. Having this surely assure your financial planning.

bankruptcy attorney Baltimore
bankruptcy attorney Baltimore

Bankruptcy is everyone’s worst nightmare and so, every individual or company needs to practice measures to avoid such situation. One of the best ways to do this is to constantly monitor expenses, income and all activities that have to do with profit or returns. Anyway, I do agree that changes are needed especially when things are not working out so well because problems like bankruptcy will never occur in the first place if things were being done the right way. This maybe a difficult undertaking and a great adjustment but it certainly needs to be done. Thank you for sharing this post.

Suzy
Suzy

The best way to avoid bankruptcy is to keeping your finances in check as at utmost importance at all times. Constantly monitoring your activity is the best preventative measure against bankruptcy and also saves money.

Glenn Reynolds
Glenn Reynolds

One way to avoid BK is to avoid Quickbooks, this would help with your sanity a little too. Over a week now and my One year payroll subscription still shows expired, even though its only 2 month old.